Paradise & Panama papers, Canada & red herrings, and the international agreement on tax havens with "enough loopholes to drive a fleet of Ferraris through"

Joyce Nelson

It’s not clear whether the Bill Morneau/Tax Revolt saga that roiled the media and Parliament throughout the last half of 2017 will continue in 2018, but it looks likely.

By mid-December pundits and politicians were calling for the Finance Minister to resign over conflict of interest charges connected with his shares in Morneau Shepell (his pension management company). Moreover, the Canadian Federation of Independent Business (CFIB) was complaining about the lack of clarity in tax changes to be introduced in January.

This brouhaha all started on July 18 when the Trudeau government announced plans to close three tax loopholes available to small business owners who incorporate their businesses as personal corporations, called Canadian-Controlled Private Corporations (CCPCs) – affecting quite a few upper middle-class professionals, from doctors, lawyers, and accountants to farmers and owners of small businesses. They were not about to take this lying down.

The CFIB took up their cause and put its own spin on things, arguing that business owners don’t have the “huge” salaries and pensions enjoyed by civil servants to rely on for retirement. On September 5, the CFIB delivered a petition to Ottawa with nearly 14,700 signatures.

Interestingly, it was later revealed that the Canadian Federation of Independent Business is a client of Morneau Shepell.

There’ve been some funny moments in all the heated rhetoric, especially on September 19 when Trudeau faced questions about his own finances since he became party leader. He said, “I no longer have dealings with the way our family fortune is managed,” which prompted Conservative MP Lisa Raitt to tweet: “Here’s a tip – if you want to be seen as a man of the people try not to refer to your assets as ‘my family fortune’.”

Tax experts estimated the most that would be collected per year from Morneau’s original tax plan was about $250 million. Meanwhile, Canadians for Tax Fairness estimates that between $10 billion and $15 billion per year in Canadian taxes goes uncollected due to tax havens. This amount would be enough to fund Pharmacare, universal childcare, free university tuition, and infrastructure improvements in First Nations communities all at the same time.

Behind all the sound and fury, something else has been going on. In order to see it, we have to look at the timeline of events. And that leads to what I call “the other Paris agreement” – not the 2015 Paris Agreement on Climate Change but another Paris agreement, one few Canadians have heard about.

Paris again

On June 7, 2017, a representative for Morneau’s Finance Department, Ginette Petitpas Taylor (at the time, the parliamentary secretary to the finance minister) went to Paris for a mass-signing ceremony. Along with representatives from 66 other countries, she was there to formally adopt something called the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. This is usually referred to as the BEPS Agreement or the BEPS Initiative.

Don’t let the boring name fool you. The BEPS Agreement is being touted as the first coordinated, international attempt to crack down on the trillions of dollars in corporate profits stashed away in offshore tax havens. As the official title indicates, governments across the planet have seen their tax base steadily eroded by multinational corporations shifting their profits into tax havens. Drafted by the G20 and the OECD (Organization for Economic Cooperation and Development), the BEPS Agreement is the result of several years of consultations (which are still ongoing, despite the formal signing).

Most tax experts agree that some of the biggest users of offshore tax havens are banks and the financial sector in general, along with multinational corporations engaged in resource extraction: forestry, mining, as well as the oil and gas sectors.

These havens are a huge issue, especially for Canada. A tiny NGO called Canadians for Tax Fairness, led by the intrepid Dennis Howlett, says that multinational corporations and the wealthiest Canadians are sending well over $250 billion per year to offshore havens to avoid paying taxes on it in Canada.

What better way to distract attention than to get Dr. Joe Blow Incorporated fighting with Dr. Jane Doe Unincorporated about income tax?

When the Panama Papers were leaked in April 2016 as anger about tax unfairness was rising worldwide, Bill Morneau told the press that Canada would become “a really strong voice” on the offshore tax haven issue, while PM Trudeau said, “It’s certainly something we will be working on together as a community of nations” – apparently a reference to the forthcoming BEPS Agreement.

In signing the Agreement on June 7, 2017, Ginette Petitpas Taylor (now federal minister of health) announced that this puts Canada “at the forefront of global action to improve international tax rules, and work towards a more fair and transparent tax system.”

There’s only one problem (or several). According to tax experts, the BEPS Agreement has major weaknesses and enough loopholes to drive a fleet of Ferraris through. As well, the BEPS Agreement doesn’t affect Canada’s Tax Information Exchange Agreements (TIEAs), which were introduced and signed by the Harper government and (as we shall see) are unique, to say the least.

Not only have our international partners delivered a tepid BEPS Agreement, but the Trudeau government continues (as Alain Deneault puts it) “to fight tax fraud by legalizing it.”

The OECD’s tax policy director had already acknowledged in 2016 that Canada’s TIEAs had caused a massive uptick in Canadian money flowing into tax havens, and he told the CBC that “we are dealing with” the issue in negotiations. But apparently, nothing was changed.

Before the BEPS Agreement was formally signed, an independent organization called the BEPS Monitoring Group issued a statement saying that the Agreement “fell short of providing a comprehensive and cohesive approach to reform of international tax laws.”

While most corporate media outlets in Canada simply ignored the BEPS Agreement signing ceremony of June 7, the Toronto Star (to its credit) published a critical article on June 8. Written by Marco Chown Oved, the article pointed out that Canada leads the world in the number of tax treaties and agreements that allow multinational corporations to escape the taxman. Oved interviewed tax authorities who said the BEPS Agreement is vaguely worded and has so many loopholes that nothing much will change, especially for Canada.

Apparently, the so-called “community of nations” has come up with a tepid agreement.

Even more important, Canada has gamed the system in favour of corporate tax cheats.

Those TIEAs

The Watershed Sentinel (November-December 2011) was one of the first Canadian media outlets to blow the whistle on Canada’s TIEAs, noting that the “new TIEAs are being touted as a means for more ‘transparency’ about tax avoidance, but there is little to justify this claim … with the new TIEAs, a corporation can repatriate those offshore profits tax-free, leaving no trace of the deferred taxes.”

This is how it works: a corporation makes its profits in Canada but can set up subsidiaries in a tax haven (usually nothing more than a PO box). The corporation can shift its profits to the tax haven (where it pays no or low taxes) and keep its losses in Canada (where they are tax deductable). The corporation can then repatriate the profits (without being taxed) as dividends for shareholders, mergers and acquisitions, share buy-backs, fat bonuses and salaries, etc.

As I wrote in 2011, tax havens are a way to “starve the beast” of government, in order to foster privatization and deregulation. What I didn’t know at the time was that the Harper government had actually changed the tax code to facilitate this tax avoidance and repatriation of profits tax-free.

Canada leads the world in the number of tax treaties and agreements that allow multinational corporations to escape the taxman.

That fact didn’t come out until 2015, when Alain Deneault, a Canadian expert on tax havens and the author of twobooks about the issue, wrote that Canada had “made a travesty” of TIEAs (created by the OECD) by adding “a provision of its own” through “section 5907 (11) of Canada’s Income Tax Regulations.”

Deneault noted that this “new loophole” created by a tax code change was endorsed by a 2008 federal advisory panel which “included an ex-chairman of the board of the Royal Bank of Canada and an ex-CEO of SNC Lavalin Group, a retired Scotiabank executive who was a director of Barrick Gold and Rogers, an international tax expert from Pricewaterhouse Coopers, and a retired Shell Canada executive.”

As Deneault bluntly put it, “While claiming to fight tax fraud, Ottawa legalizes its every aspect. At the same time, its honour is untarnished in that it actively looks for TIEAs to sign and can therefore boast of being part of the international initiative instigated by the OECD. Fighting tax fraud by making it legal: this is truly Orwellian.”

As far as I can determine, no other country has this arrangement.

Both the CBC and the Toronto Star reported this Orwellian situation in 2016 and stated that the Trudeau Liberals had done nothing to change it. In June 2017, the day after Ginette Petitpas Taylor signed the other Paris agreement, the Toronto Star again raised the issue.

I suspect that the Liberal government, which had said that Canada would be “a really strong voice” on the offshore tax haven issue, felt there might be a need to distract attention from the matter, before the whole issue of tax havens could further galvanize Canadian taxpayers.

What better way to distract attention than to get Dr. Joe Blow Incorporated fighting with Dr. Jane Doe Unincorporated about income tax? Six weeks after the BEPS Agreement was signed on June 7, Morneau’s Finance Department released the plan to remove those three tax loopholes benefitting incorporated professionals – sparking outrage throughout the summer and autumn.

Driving the narrative

Before Morneau’s alleged conflicts of interest became an issue in mid-October, the pundits had a field day. For example, The Globe and Mail’s Campbell Clark wrote (September 6) that this is Morneau’s “first real fight” and he’s “eager” to take it on. “He wanted this. He wants to take on the argument that if the government does not stop the use of private corporations for personal tax advantages, Canada will have a two-tier tax system for incorporated business people and everybody else – and that gap will grow bigger over time.” As Morneau told reporters in Vancouver on September 6, “We want to make sure … that we’re not creating an ongoing tax advantage for a privileged few.”

Such things were being said with a straight face as Morneau and Trudeau metaphorically put on their Robin Hood costumes.

During the height of the rhetoric, Conrad Black called Morneau’s tax plan “a seismic lurch to the left.” Actually, the original tax plan fits rights into the neoliberal economic agenda of shifting the tax burden further away from multinational corporations.

So what was the one thing that almost never came up? I followed the issue (in print) from mid-July to the end of October and found only three articles that referred to tax havens. In each instance it was an NDP member of Parliament that raised the offshore issue.

Various tax experts estimated that the most that would be collected per year from Morneau’s original tax plan (most of it later rolled back) was about $250 million. Meanwhile, Dennis Howlett of Canadians for Tax Fairness (CTF) was estimating in September that because of offshore tax havens, at least $8 billion in Canadian taxes on multinational corporations goes uncollected annually.

During the height of the rhetoric, Conrad Black called Morneau’s tax plan “a seismic lurch to the left.” Actually, the original tax plan fits rights into the neoliberal economic agenda of shifting the tax burden further away from multinational corporations.

After the November 5 release of another tax havens data-leak called the Paradise Papers, CTF revised its estimate to between $10 billion and $15 billion per year in Canadian tax losses due to tax havens. In their important November 2017 report Bay Street and Tax Havens: Curbing Corporate Canada’s Addiction, CTF stated that this amount would be enough to fund Pharmacare, universal childcare, free university tuition, and infrastructure improvements in First Nations communities all at the same time.

On November 8, PM Trudeau tried to quell the uproar about the Paradise Papers by telling the press, “We have done much in regards to tax avoidance and tax evasion, including working with international partners.”

It’s a tired old line that we’ve heard before.

Not only have those international partners delivered a tepid BEPS Agreement, but the Trudeau government continues (as Alain Deneault puts it) “to fight tax fraud by legalizing it.”

Good news

As a Toronto Star editorial (November 8, 2017) noted, “The Paradise Papers are doing nothing to soothe those who worry about the unseemly intertwining of money and power in politics or about the extent to which the economy is rigged by the few against the many. The government can do something about that. It can, for instance, close unfair and ineffective tax loopholes and collect what’s owed. Or it can sit back, defend the current arrangements and watch the cynicism grow.”

The good news is that the BEPS Agreement is still being negotiated internationally and could be rewritten to take much stronger action against tax evasion and tax avoidance.

Similarly, the tax code changes that the Harper government added as a provision to TIEAs could be eliminated.

Both of these changes would need a loud, concerted and immediate push from the Canadian public. In other words, this is no time for either apathy or cynicism.